Avoiding the One-Night Stand

Stating that all customers are not created equal is hardly an oversimplification. But, just like the pigs in Orwell’s “Animal Farm,” some customers are more equal than others. No company has unlimited resources to equally service or support all its customers. Repeat buying power, the essence of customer loyalty, is everything. Some customers are worth a great deal, some may become more valuable over time, some may be valuable for a brief period but may be easily lured away, and some are never likely to become valuable.

Stating that all customers are not created equal is hardly an oversimplification. But, just like the pigs in Orwell’s “Animal Farm,” some customers are more equal than others. No company has unlimited resources to equally service or support all its customers. Repeat buying power, the essence of customer loyalty, is everything. Some customers are worth a great deal, some may become more valuable over time, some may be valuable for a brief period but may be easily lured away, and some are never likely to become valuable.

At minimum, companies need to segment their customers so they can determine how much longer that customer will remain with them, how much revenue each customer will contribute, how much and what kind of services the customer should receive, and what efforts will be needed to keep them whether they are new, at risk, or even already lost. Also, if a company is changing product or service focus—such as beginning a new customer experience management or frequency marketing program—decisions will have to be made about which customers it wants to retain.

Just as companies are becoming smarter about keeping the customers they want or “firing” less attractive customers through stepped-down services, they have to invest more upfront, at the beginning of the customer life cycle, in learning which potential customers will be the most valuable over time. This goes beyond segmentation. It is almost pre-segmentation.

Here’s a prime example. The business of gaming in Las Vegas, Atlantic City, numerous riverboats, Indian reservations and offshore is built not on a house of cards, but a house of numbers. At Las Vegas casinos like the Rio, those players who gamble $1,000 a day with the Rio, whether they win or not, receive the designation “hosted guests.” These are the kinds of customers the Rio works hard to acquire. Their level of play accords them VIP status, with more “comps” (free dinners, show passes and other gifts). Each hosted guest has an individual staff host assigned to check on them and provide any needed services.

The host is actually a highly paid, personal customer service representative. It’s an important position, which casino operations like the Rio consider pivotal to their success. The hosts cultivate relationships with the players; and VIP players are encouraged to call their hosts before arriving at the casino, so the host can have show tickets, restaurant reservations and suites set up, per the player’s profile.

There’s even a higher echelon of gaming customers—those players who have a $1 million line of credit. They get the best suites and virtually everything the casino has to offer. They’re nicknamed “whales,” and with good reason. At the Rio, this means a suite with 7,000 square feet of space and bathroom sinks with gold-plated faucets. These players are relied upon to bet in the Rio’s secluded back room, called the Salon, where they may play baccarat and roulette with $100,000 chips.

In an industry like gaming, where the level of customer migration is very high, it is imperative that casinos not only keep the players they want but target the right customers in the first place. They do this in a number of ways, including geodemographic profiling for their acquisition. For the high rollers they’ve lost, many of the casinos make an extra effort to get them back, as well.

Advanced companies have begun applying “conversion” models, seeking customers who:

  • Need less direct motivation (incentive) or indirect motivation (promise of support and committed resources) to purchase;
  • Have demonstrated more resistance to claims and attempts to lure them away;
  • Are less price-sensitive;
  • Are more accepting of occasional value delivery lapses and are less likely to accept alternatives if the brand/service is unavailable; and
  • Demonstrate more positive attitudes about “their” brand.

In the retail automotive industry, as another example, potentially loyal new customers take less time making their purchase decisions, consider fewer dealerships, are less price-driven, and rely less on magazine articles and other media and more on previous experience and personal recommendation.

Some years ago, South African researchers Jan Hofmeyr and Butch Rice created an effective conversion model, which helped marketers develop and sustain effective customer loyalty initiatives programs for customers, both new and established. They found that, beyond customer needs and value delivery requirements, companies must understand the potential depth of a customer’s commitment to the supplier. Part of this means identifying the degree of customers’ tangible and intangible involvement with the company. Tangible involvement can include such factors as the actual dollar cost of switching to a competitor. Intangible issues include the emotional strength of the connection or the upset and insecurity created by switching suppliers. The model also measures the degree of attractiveness of competitive brands, based on what these customers want as prioritized elements of value.

Hofmeyr and Rice’s model also enabled them to view their clients’ marketplace in terms of users and non-users. Users can be divided into those who are truly committed and loyal and those who are “convertible”; that is, declining or wavering in their loyalty. Non-users—prospects and previous customers—are divided into potentially convertible and non-available (because they are committed to their current supplier).

Detailed analysis could then be developed for current customers and prospects. The percentage of current customers who are entrenched, or completely loyal, can be identified, as well as those who have moderate loyalty, shallow loyalty, or convertibility (true vulnerability). Non-users, or prospects, could also be identified in a similar manner: those who are available, or highly receptive to a competitive offer; and those who are ambivalent, but who would switch with the right value-based incentive. Other prospects, who have average or strong loyalty to their brand or supplier, are considered unavailable by the model.

The model has been used to plan the amount of advertising and promotional activity required for new customers and prospects, according to their commitment level and potential value. It has been applied in more than 50 countries and for scores of products and services.

On an everyday, or tactical, basis, companies should also always be on the lookout for customers who could represent more of a problem than the revenue they might contribute. Through our own research, we’ve identified seven such types of customers:

  • Non-Complainers—Customers who never express any negative feelings about performance or identify potential areas of improvement may just be hiding their disaffection. Marketing scientist Theodore Levitt has said: “One of the surest signs of a bad or declining relationship with a customer is the absence of complaints. Nobody is ever that satisfied, especially not over an extended period of time.”
  • Over-Complainers—Customers who tend to complain frequently, sometimes irrespective of whether their issues are really consequently or not, can beat down a company’s morale and overtax its support infrastructure.
  • Price Grinders—New customers who pressure their suppliers to lower prices on initial sales in return—they often promise—for future business that may or may not exist.
  • Chronic Defectors—When customers have a history of pulling their business without explanation or warning, this may be a sign that they’ll never be happy with any supplier’s performance. Their volatility and refusal to communicate issues makes them undesirable.
  • Friends in Need—These “quick-jump” customers who want to find new suppliers with great haste often don’t make purchase decisions very well, or they may have economic challenges.
  • Discourteous Slobs—Any customers who are chronically rude and verbally abusive, even though they may not contact their suppliers frequently, can undermine a company’s morale and operations. If they have reason to be upset or annoyed, that’s one thing. Their concerns should, obviously, be addressed and dealt with as quickly as possible. If the negative behavior continues, they’re probably not worth the effort.
  • Misfits—The needs of some new customers may simply not align well with the supplier’s ability to perform. If, for example, 99.9 percent of the deliveries to customers are made during normal business hours and the new customer wants delivery in the middle of the night, unless this customer truly represents a great deal of business, they are probably not serviceable.

If most people are like me—a statement always open to interpretation—virtually every day they will see content or promotional material from long distance telephone companies offering their latest and greatest low cost plans. Typically, they don’t try to find out about my business and personal long distance needs. They just try to push the plan. One of the enduring reasons for the high rates of customer turnover in this industry is the lack of scientific prospect targeting, and attempts to understand potential customers’ tangible and intangible switching issues, done at the outset. Perhaps it’s time for their conversion.

Too Big to Fail – But Not Too Big to Suck

On a recent “Real Time With Bill Maher” show, Maher responded to the announcement that Time Warner Cable would merge with Comcast Corp. in a $45 billion purchase. He noted that, combined, the two cable systems represent 19 of the 20 largest U.S. markets; and, apart from suppliers like Dish and DirecTV, they have no competitors in these metros. Further, Maher said, the two companies have the lowest customer satisfaction ratings of any cable system. So, as he asked his panelists, where is the value for customers in this merger if both companies are known to have questionable service performance?

On a recent “Real Time With Bill Maher” show, Maher responded to the announcement that Time Warner Cable would merge with Comcast Corp. in a $45 billion purchase. He noted that, combined, the two cable systems represent 19 of the 20 largest U.S. markets; and, apart from suppliers like Dish and DirecTV, they have no competitors in these metros. Further, Maher said, the two companies have the lowest customer satisfaction ratings of any cable system. So, as he asked his panelists, where is the value for customers in this merger if both companies are known to have questionable service performance?

The Federal Communications Commission (FCC) will, of course, have a great deal to say about whether this merger goes through or not. During the past couple of decades, we’ve seen a steady decline in the number of cable companies, from 53 at one point to only six now. Addressing some of the early negative reaction to its planned purchase of TWC-which would increase Comcast’s cable base to 30 million subscribers from the 22 million it currently has (a bit less than 30 percent of the overall market)-Comcast has already stated that it will make some concessions to have the merger approved. But, that said, according to company executives, the proposed cost savings and efficiencies that will “ultimately benefit customers” are not likely to either reduce monthly subscription prices or even cause them to rise less rapidly.

Comcast executives have stated that the value to consumers will come via “quality of service, by quality of offerings and by technological innovations.” David Cohen, their Executive VP, said: “Putting these two companies together will not deprive a single customer in America of a choice he or she will have today.” (Opens as a PDF) He also said, “I don’t believe there’s any way to argue that consumers are going to be hurt from a price perspective as a result of this transaction.” But, that said, he also admitted, “Frankly, most of the factors that go into customer bills are beyond our control.” Not very encouraging.

As anyone remotely familiar with Comcast’s history will understand, this is not the first time the company has navigated the river of communications company consolidation: 1995, Scripps, 800,000 subscribers, 1998, Jones Intercable, 1.1 million subscribers; 2000, Lenfest Communications, 1.3 million subscribers.

In 2002, Comcast completed acquisition of AT&T Broadband, in a deal worth $72 billion. This increased the company’s base to its current level of 22 million subscribers, and gave it major presence in markets like Atlanta, Boston, Chicago, Dallas-Ft. Worth, Denver, Detroit, Miami, Philadelphia and San Francisco-Oakland. In a statement issued by Comcast at the time the purchase was announced, again there was a claim that the merger with AT&T would benefit all stakeholders: “Combining Comcast with AT&T Broadband is a once in a lifetime opportunity that creates immediate value and positions the company for additional growth in the future. Shareholders, employees, and customers alike are poised to reap considerable benefits from this remarkable union.”

There have been technological advances, additional content, and enhanced service, during the ensuing 13 years. But “immediate value” and “considerable benefits”? Having been professionally involved with customer research conducted at the time of this merger, there was genuine question regarding the value perceived by the newly acquired AT&T customers. In a study among customers who discontinued with Comcast post-merger, and also among customers who had been Comcast customers or AT&T customers prior to the merger, poor picture quality (remember, these were the days well before HD), service disruption and high/continually rising prices were the key reasons given for defection to a competitor.

Conversely, when asked to rate their current suppliers on both key attribute importance (a surrogate measure of performance expectation) and performance itself, the highest priorities were all service-related:

  • Reliability of cable service
  • Availability of customer service when needed
  • Speed of service problem resolution
  • Responsiveness of customer service staff

On all principal service attributes except “speed of service problem resolution,” the new supplier was given higher ratings than either Comcast or AT&T. And there were major gaps in all of the above areas. Overall, close to 90 percent of these defected customers said they would be highly likely to continue the relationship with their new supplier. When correlation analysis was performed, pricing and service performance were the key driving factors. In addition, even if Comcast were now able to offer services that overcame their reasons for defection, very few (only about 10 percent) said they would be willing to become Comcast customers again.

Finally, we’ve often focused on unexpressed and unresolved complaints as leading barometers, or indicators, of possible defection. Few of the customers interviewed indicated problems with their current suppliers; however, as in other studies, problem and complaint issues were frequently surfaced for both Comcast and AT&T.

It should be noted that having lost a significant number of customers to Verizon’s FiOS, Comcast has a winback program under way, leveraging quotes from subscribers who have returned to the Xfinity fold. In the usual Macy’s/Gimbel’s customer acquisition and capture theater of war, this marks a marketing change for Comcast. As often observed (and even covered in an entire book, with my co-author, consultant Jill Griffin), winback marketing strategies are rather rarely applied, but can be very successful.

One of the key consumer concerns, especially as it may impact monthly bills, is the cost and control of content. For example, Netflix has agreed to pay Comcast for an exclusive direct connection into its network. As one media analyst noted, “The largest cable company in the nation, on the verge of improving its power to influence broadband policy, is nurturing a class system by capitalizing on its reach as a consumer Internet service provider (ISP).” This could, John C. Abell further stated, be a “game-changer.” Media management and control such as this has echoes of Big Brother for customers, and it is all the more reason Comcast should be paying greater attention to the evolving needs, as well as the squeeze on wallets, of its customers.

Perhaps the principal lesson here, assuming that the FCC allows this merger to proceed and ultimately consummate, will be for Comcast to be proactive in building relationships and service delivery. There’s very little that will increase consumer trust more than “walking the talk,” delivering against the claims of what benefits customers will stand to receive. Conversely, there’s little that will undermine trust and loyalty faster, and more thoroughly, than underdelivery on promises.